Productive signaling equilibria and over-maintenance: An application to real estate markets

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Abstract

When there is asymmetric information regarding the quality of a traded durable asset, the informed seller might signal asset quality to prospective uninformed buyers by investing in improvements and maintenance. In contrast to Spence (1973), however, this signal may be productive. We derive conditions of signal productivity under which signaling separating, signaling pooling, and no-signaling pooling equilibria persist. We examine welfare implications of the model and identify the over-investment in maintenance effect that persists in efficient markets with asymmetric information and productive signaling. Furthermore, we conduct comparative statics analysis of the results and show the range of parameter values in which a particular equilibrium is attained. While the model and its outcomes apply to various durable assets, we particularly refer in the analysis to real estate markets.

Original languageEnglish
Pages (from-to)255-271
Number of pages17
JournalJournal of Real Estate Finance and Economics
Volume28
Issue number2-3
DOIs
StatePublished - 2004
Externally publishedYes

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